US setback stuns ChemGenex

ChemGenex Pharmaceuticals may face a raft of earnings downgrades after it delivered a shock to the system on Tuesday on news that its lead drug candidate is unlikely to be approved by US health regulators.

The stock suffered its worst one-day fall in more 17 years of 36.69 per cent to 44¢ when the US Food and Drug Administration’s Oncologic Drugs Advisory Committee voted seven-to-one to recommend rejecting Omapro to treat leukaemia patients who are resistant to the existing treatment, Gleevec.

The market had high hopes for Omapro as experts thought the committee would vote in favour of the drug, considering there were no alternatives for these patients.

“There is very little news to go on, and if I owned the stock I would have sold it straight away because it was a seven-to-one vote," said Julian Mitchell of biotech and technology investment fund JM Financial Group.

“The concern is that
ChemGenex
doesn’t have a standard to diagnose patients with the leukaemia mutation they seek to treat, and a test will need to be developed, and also comment by one of the panel members that the research was ‘sloppy’, which is really disconcerting."

ChemGenex will probably have to raise capital to fund the development of a test. Wilson HTM Investment Group, which had been a big supporter of the stock, rating it a “buy", said it believed the news yesterday was major setback, and is recommending investors sell the stock as it cannot yet quantify the impact this will have on valuation.

TPG Telecom

In contrast,
TPG Telecom
soared to a record on Tuesday after the emerging telecommunications services provider upgraded its earnings guidance and reported that its bottom line grew fourfold in the six months to January.

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Management lifted its half-year net profit guidance to $27.5 million from $5.1 million for the same time last year even as revenue came in flat at $241.5 million.

Its earnings were bolstered by cost cutting, lower financing costs and a smaller write-down of intangibles, which helped lift its free cash flow by 68 per cent to $54.2 million.

Its robust cash position was used to fund the recent acquisition of Pipe Networks, which owns the internet backbone connecting Australia to Guam, and to double its interim dividend to 2¢ a share.

TPG is forecasting more cost savings due to synergies from the acquisition and expects to shave around $100 million in expenses over the next four years from 2010-11.

Management also upgraded its guidance on full-year earnings before interest, tax, depreciation and amortisation (EBITDA) to $152 million to $158 million, from an earlier range of between $140 million and $150 million.

The news may not excite brokers as consensus estimates on Bloomberg had already pencilled in EBITDA of $158.3 million for 2009-10.

Some might also feel the stock is starting to look fully priced despite the company’s upbeat outlook. It has rallied more than 1200 per cent over the past 12 months, putting its price-earnings multiple at more than 30 times for this financial year.

While its strong earnings growth profile will shave this P/E to just 19 times for 2010-11, that is still a fairly high multiple for a telecommunications firm.

Ceramic Fuel Cells

Another small cap that has recently released pleasing news is
Ceramic Fuel Cells
.

The stock was the best performer on the S&P/ASX Small Ordinaries index on Monday, jumping 16.7 per cent after Mitsui & Co ordered one of its BlueGen gas-to-electricity units for testing and demonstration by Osaka Gas in Japan.

The company’s technology is not only riding on the trend towards renewable low-emission power generation, but could be a winner of “decentralised power" became the way of the future.

Some experts believe we are heading towards households and businesses generating electricity on site instead of depending on massive and costly infrastructure.

Ceramic’s solid oxide fuel cell technology converts natural gas into electricity and heat without combustion or noise, and is reported to be 60 per cent more efficient than competing technologies

Despite the strong potential for its products, Ceramic is only suitable for risk-tolerant investors with a longer investment horizon.

The company is not expected to turn a profit until 2011-12 at the earliest, and even then the stock is trading on a P/E multiple of around 30 times.